India: Construction & Engineering Law

Last Updated: 5 September 2017
Article by Sumeet Kachwaha and Dharmendra Rautray

1 Making Construction Projects

1.1 What are the standard types of construction contract in your jurisdiction? Do you have contracts which place both design and construction obligations upon contractors? If so, please describe the types of contract. Please also describe any forms of design-only contract common in your jurisdiction. Do you have any arrangement known as management contracting, with one main managing contractor and with the construction work done by a series of package contractors? (NB For ease of reference throughout the chapter, we refer to "construction contracts" as an abbreviation for construction and engineering contracts.)

The construction industry in India does not subscribe to any standard form of construction contract, however, some of the commonly used forms include the suite of contracts published by FIDIC (International Federation of Consulting Engineers), ICE (Institution of Civil Engineers) and the model published by the IIA (Indian Institute of Architects). Governmental construction authorities, such as the National Highways Authority of India ("NHAI"), employ their own standard form contract as per their departmental requirements, particularly for Public and Private Partnership projects. One standard FIDIC form extensively used in the Indian construction industry is the Plant and Design/Build Contract. Design-only contracts prevalent in India are majorly inspired by the FIDIC Conditions of Contract for Plant and Design/ Build (the FIDIC Yellow Book).

Besides the NHAI, several government departments such as the Public Works Department, Delhi Metro Rail Corporation, Indian Oil Corporation, National Building Construction Corporation, Central Public Works Department, etc. have their own standard form contracts.

Management contracts are executed in the form of Engineering, Procurement and Construction Management Contracts. As the name suggests, such contracts are executed between employers and contractors, wherein contractors are hired to holistically manage the completion of a construction project while overseeing developments regarding engineering, procurement and construction of a project.

1.2 Are there either any legally essential qualities needed to create a legally binding contract (e.g. in common law jurisdictions, offer, acceptance, consideration and intention to create legal relations), or any specific requirements which need to be included in a construction contract (e.g. provision for adjudication or any need for the contract to be evidenced in writing)?

The Indian law of contracts is codified (Indian Contract Act, 1872 – the "Act"). It is largely based on English Common Law. For any binding contract to come into existence, there should be an agreement between two or more parties who are competent to contract, and the parties must have entered into the agreement with their free consent, for a lawful consideration and a lawful object. These requirements are mandated by the Act (Section 10 thereof). As all other contracts, construction contracts must also satisfy the aforesaid requirements to be legally enforceable. Further, rudimentary requirements of a valid offer, followed by an acceptance of an offer, with the intention of entering into a legally enforceable agreement not void in law, are other essentials of a valid contract under the Act. As the Act provides, contracts need not be evidenced in writing, which similarly applies to all construction contracts.

1.3 In your jurisdiction please identify whether there is a concept of what is known as a "letter of intent", in which an employer can give either a legally binding or non-legally binding indication of willingness either to enter into a contract later or to commit itself to meet certain costs to be incurred by the contractor whether or not a full contract is ever concluded.

The legal position in India as regards a "Letter of Intent" ("LOI") is well settled and can be understood while referring to the contract law principle to the effect that an agreement to enter into an agreement does not create any legal relation between the addressor and its addressee, nor is it legally enforceable before a court of law.

A letter of intent merely indicates a party's intention to enter into a contract with the other party in future. Normally, it is an agreement to 'enter into an agreement' which is neither enforceable nor does it confer any rights upon the parties. However, some aspects of a LOI may contain binding obligations, if so specifically provided therein.

Such aspects may include clauses concerning confidentiality and exclusivity of dealings, amongst others. In certain circumstances it may be construed as a letter of acceptance of the offer resulting in a concluded contract between the parties. It largely depends on the intention of the parties to be drawn from the terms of the Letter of Intent, the nature of the transaction and other relevant circumstances. If parties have acted on a Letter of Intent (as if there is a binding obligation), it is likely to be held as a binding contract between them. In India, a binding contract can result from conduct alone.

1.4 Are there any statutory or standard types of insurance which it would be commonplace or compulsory to have in place when carrying out construction work? For example, is there employer's liability insurance for contractors in respect of death and personal injury, or is there a requirement for the contractor to have contractors' all-risk insurance?

The standard type of insurance policy opted by the employer, contractor or a sub-contractor separately or jointly is the Contractor's All Risk Policy ("CAR Policy"). All major construction contract projects expressly provide for putting in place a CAR policy during the construction stage. Federal legislation requires any business including construction projects employing more than 10 people to procure registration under the Employees' State Insurance Act, 1948 ("ESI Act").

The ESI Act mandates every employer to provide for its worker's insurance. The said Act covers both workers employed directly under an employer and through a contractor. The insurance procured by an employer/contractor under the mandate of the ESI Act covers for contingencies such as maternity leave, sickness, temporary or permanent physical disablement, or death owing to the hazards of employment which may lead to loss of wages and earning capacity of an employee.

1.5 Are there any statutory requirements in relation to construction contracts in terms of: (a) general requirements; (b) labour (i.e. the legal status of those working on site as employees or as self-employed sub-contractors); (c) tax (payment of income tax of employees); or (d) health and safety?

The following are some of the statutory requirements which must be complied with:

(a) General requirements: As stated above, all construction contracts must satisfy the requirements of the Indian Contract Act, 1872 to be legally enforceable. There are no statutory requirements specifically in relation to construction contracts.

(b) Labour: All employers and contractors are required to comply with the relevant labour legislations in force in India or in the state/city concerned. The onus of complying with such labour laws falls upon an employer or a contractor depending on the legislation. Labourers get their legal recognition from the definition of the word "workman" under the Industrial Disputes Act, 1947 (a Federal legislation) which entitles them to various statutory benefits and fair treatment at the hands of their employer/contractor. Further, the Contract Labour (Regulation and Abolition) Act, 1970 must be complied with by any principal employer/contractor who hires 20 or more contract labourers for an "establishment". The said Act requires the principal employer to register its establishment in accordance with the Act, whereas all such contractors must obtain a licence from the authorised licensing authority specified in the Act. In order to regulate the condition of service of inter-state labourers, the Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979, requires all contractors who employ five or more inter-state migrant workmen to register themselves. It is aimed to protect and/or provide a migrant worker's right to equal wages, displacement allowance, home journey allowance, medical facilities, etc. The Workmen's Compensation Act, 1923 require that compensation be paid to workers if injured in the course of employment. Under the Minimum Wages Act, 1948, the employer is required to pay the minimum wage rates as may be fixed by the relevant government. Further, the Payment of Wages Act, 1936 ensures that the employees receive wages on time and without any unauthorised deductions.

(c) Tax: A person responsible for paying any sum to a contractor for carrying out any work (including supply of labour for carrying out any work) is required to, at the time of payment, deduct tax commonly known as Tax Deducted at Source ("TDS") under Section 194C of the Income Tax Act. The Works Contract Tax is applicable to contracts for labour, work or service. Other taxes include VAT and Service Tax. The Building and Other Construction Workers Welfare Cess Act, 1996 which applies to 10 or more building workers or other construction work, has been enacted for the welfare of construction workers including regulating the workers safety, health, and other service conditions. A cess of 1% is collected from the employer on the cost of construction incurred.

(d) Health and Safety: Social security legislations such as the Employee's Compensation Act, 2009, Employees' State Insurance Act, 1948, Maternity Benefit Act, 1961, Payment of Gratuity Act, 1972, and the Employees' Provident Fund Act, 1952 mandatorily apply to all employers and contractors hiring labourers or workmen in the construction industry.

1.6 Is the employer legally permitted to retain part of the purchase price for the works as a retention to be released either in whole or in part when: (a) the works are substantially complete; and/or (b) any agreed defects liability is complete?

Yes. In construction contracts, provision for retaining part of the purchase price for the given situations is fairly common. Parties may also agree to deposit the purchase price in an escrow account to ensure a level-playing field for both the employer and the contractor. The contract may provide that the employer, prior to completion of the works, releases the retention money provided the contractor furnishes an unconditional bank guarantee equivalent to the retention money.

1.7 Is it permissible/common for there to be performance bonds (provided by banks and others) to guarantee performance, and/or company guarantees provided to guarantee the performance of subsidiary companies? Are there any restrictions on the nature of such bonds and guarantees?

Yes, performance bonds/performance guarantees are commonly provided for in construction contracts in India to provide security against failure of a contractor to perform its contractual obligations. Similarly, an employer may require company guarantees from parent companies against the duties and obligations of a subsidiary company involved in a construction contract.

The nature of restrictions that may apply to a performance guarantee will depend upon the wording of the terms of guarantee. A performance guarantee, in nature, is a contract between an employer and a guarantor, independent of the contract between an employer and a contractor. Therefore, unless otherwise provided, a guarantor shall be obliged to unconditionally honour a guarantee as and when called upon by the employer.

Normally, construction contracts require the contractor to furnish an unconditional performance bank guarantee to ensure timely and satisfactory performance by the contractor. The employer normally requires the contractor to keep the performance bank guarantee valid until the defect liability period is over or the completion certificate is issued. The beneficiary of the bank guarantee, i.e. the employer, must make a demand for payment under the bank guarantee, should a need so arise, before the expiry of validity period stipulated in the bank guarantee. A demand made by the employer for payment after the validity period will not be honoured by the bank.

1.8 Is it possible and/or usual for contractors to have retention of title rights in relation to goods and supplies used in the works? Is it permissible for contractors to claim that until they have been paid they retain title and the right to remove goods and materials supplied from the site?

Yes it is possible. Right to lien over goods arises from the contractor's right to be duly paid for the goods supplied to an employer. The existence of right of lien over goods, and the scope of such right, is determined by a contractual clause to that effect. Lien over goods whose ownership passes over to an employer on delivery to, or affixation on, a construction site may exist if contractually so provided for. However, most construction contracts do not provide for the contractor's title rights to the goods and supplies made for the works.

Download - Construction & Engineering Law

Originally published in Global Legal Group

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions